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Labor Demand on a Tight Leash

Mario Bossler and Martin Popp

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Abstract: We develop a labor demand model that encompasses pre-match hiring cost arising from tight labor markets. Through the lens of the model, we study the effect of labor market tightness on firms' labor demand by applying novel Bartik instruments to the universe of administrative employment data on Germany. In line with theory, the IV results suggest that a 10 percent increase in labor market tightness reduces firms' employment by 0.5 percent. When accounting for search externalities, we find that the individual-firm wage elasticity of labor demand reduces from -0.7 to -0.5 at the aggregate level. For the 2015 minimum wage introduction, the elasticities imply only modest disemployment effects mirroring empirical ex-post evaluations. Moreover, the doubling of tightness between 2012 and 2019 led to a significant slowdown in employment growth by 1.1 million jobs.

Date: 2022-03, Revised 2023-02
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Handle: RePEc:arx:papers:2203.05593